Financial advice is to limit the number of liabilities that you have. But what exactly is a liability, and why is it considered risky to have too many liabilities? A liability is something that you owe money on. A liability can also be considered a risk or obligation that usually has a monetary value to it.
Liabilities are placed into two categories. There are current and non-current liabilities. Current liabilities can be paid back within a year or less, while non-current liabilities take longer than a year to pay back.
Most people have at least one non-current liability like a mortgage or car payment. The loans for cars are usually 3-6 years, and a mortgage is usually 15 or 30 years. These types of liabilities will not be paid off in a year or less. Even if you are aggressively paying off your car or house, paying off these debts will probably take over a year.
Current liabilities are things that you can settle quickly, such as a credit card balance or something you can easily sell. Other forms of current liabilities are payable wages, accounts, and taxes. While your 30-year mortgage is considered non-current, the payments that you will make in a year are considered current liabilities.
A home can be both a liability and an asset. For example, your mortgage is a liability, but if you can sell the home and make money, then it is an asset. If you owe your money outright, then it is completely an asset because you do not owe anything on it.
While most people cannot fully avoid liabilities, it’s important to have fewer liabilities, especially when comparing them to your assets. You want to have more assets than liabilities to have a positive net worth. If you have more liabilities than thanes, your ill have a negative net worth. Having a mix of current and non-current liabilities is important. You can quickly pay off your current liabilities if you want to improve your net worth.